President Trump’s Necessary German Lessons

Donald Trump has criticized Germany’s enormous current-account surplus, which he considers the result of German currency manipulation. But Trump is wrong: while Germany’s external surplus, at 8% of GDP, is big – too big – currency manipulation has nothing to do with it.

MUNICH – US President Donald Trump has criticized Germany’s enormous current-account surplus, which he considers the result of German currency manipulation. But the president is wrong. While Germany’s external surplus, at 8% of GDP, is big – too big – it is not the result of currency manipulation by Germany. The real culprits are an inflationary credit bubble in southern Europe, the expansionary policies of the European Central Bank, and the financial products US banks sold to the world. So, instead of blaming Germany, President Trump would do well to focus on institutions in his own country.

Germany’s trade surplus is rooted in the fact that Germany sells its goods too cheaply. Here, the Trump administration is basically right. The euro is too cheap relative to the US dollar, and Germany is selling too cheaply to its trading partners within the eurozone. This undervaluation boosts demand for German goods in other countries, while making Germany reluctant to import as much as it exports.

The euro is currently priced at $1.07, whereas OECD purchasing power parity stands at $1.29. This implies a 17% undervaluation of the euro. Moreover, Germany is 19% too cheap within the eurozone if one uses as a baseline a calculation by Goldman Sachs from 2013 and subtracts the appreciation in real terms since that time. On the whole, this implies that Germany’s currency is undervalued by about a third.

GERMAN GENIUS @ THE ANGLOSPHERE
The Anglosphere needed German lessons in 1714 - Prince of Hanover George Ludwig became King George I of England.
The Anglosphere needed German lessons in 1814 - Marshal Blucher provided @ Waterloo.
The last time America needed German lessons in 1971 - Dr. Kissinger provided the PetroDollars.
This time America in need of German lessons - Dr. Trump will provide the NatoDollars.
The history and pedigree of German genius is incredible and indelible.

1) The US operates a transfer union in that tax is variable and Central and public spend is variable, effectively a subsidy to stop economic decline and depopulation in some locations. The EZ has no such mechanism hence the build up of debt in locations (and economic decline and depopulation). Fed dependency article here -
https://wallethub.com/edu/states-most-least-dependent-on-the-federal-government/2700/
2) Depends. Some discussion about Mexico here -
http://uk.businessinsider.com/fact-checking-trump-alternative-facts-mexico-2017-3

The US could seal itself off and produce everything. However it would have to pay off its foreign held monumental national debt and forfeit being a Reserve Currency which assists it borrowing the said monumental debt. Stop people wanting USD and the game implodes. Enjoy. Oh yes BTW, it would lose its military sales - 33% of the worlds sales
http://edition.cnn.com/2016/05/24/politics/us-arms-sales-worldwide/

If ECB stops ultra-loose monetary policy the Ruhr will look like a desert in Central Lybia in less than a decade. Be careful what you wish for.

If the Euro broke up, probably the Mark will appreciate 20% to the USD, but it would appreciate 50 to 70 % to Escudo, Peseta, Lira, Drachma.
And Germany as we know it would cease to exist as a manufacturing beast.

ECB buys Southern European countries bonds to help them avoiding default to their German creditors. So in essence, ECB is ultimately bailing out Germany's entire banking system.

Courtesy of Bill Clinton killing the Glass-Steagal Act, US banks were able to take stupid money from desperate yield chasing penguins on a worldwide basis. Not only German money (you love so much to play the victim role! ).

As I repeated in other posts, Germany is truly the greatest currency manipulator two decades running. They have it in their blood. Hitler used that tool too as far as he could. Same as Governor Hjalmar Schacht after Versailles Treaty.

If debt is needed for your growth it is obviously cheaper if it is somebody elses debt and they are paying the bill. This is why there is so much character assassination going on of those holding the debt

Mats, it is a combination of factors (1) oversupply of cheap labor (2) cheap currency (3) cheap imports from 3rd countries and exporting them at much higher prices (4) higher exports at subsidised terms, etc... Trump and his administration are now investigating the currency manipulation and the dumping of cheap goods by many countries to include Germany. See Reuters of today.

Well the bare bones of the EZ are laid bare in this article. The German voter quite reasonably - up to a point - expects the German government to act in the interests of German citizens not Spanish or Greek citizens to name two.

Because the empirical evidence is being lead by German voters preferences is not in the interests of non-German voters they are not prepared to enter subjugation of sovereignty to another entity which de facto is pragmatically required for the EZ to function. Nor is Germany - or other Northern countries of the same mindset - prepared to subsidise - as they see it - the Med Club that 'spend all their money on drink and women' to quote the toxic Djisselbloem, President of the European Stability Mechanism, a bodging tool to dispense financial nonsense and fill potholes in the road ahead, paving the road in taxpayers gold. The only outcome long term can be the Euro on the seabed alongside the Battleship Bismark

How anybody can identify the key structural problem as Has-Werner has done but at the same time not declare the situation is unsustainable is beyond me. The level of advantage give to Germany by the Euro can only result long term with massive indebtedness to Germany by other EZ members. All common currency areas require a automatic transfer mechanism in order to function which is not present in the EZ. Only economic decline, debt and depopulation can occur for some countries. That this is done in full knowledge by the beneficiaries simply means they are not fit to lead a union

The complacency and selfishness (among other factors) of the German establishment caused WW1 & WW2 and is brewing WW3, hoping for a change of mentality and for a responsible role on their part can only be wishful thinking.

I agree with most of the brillant arguments that Dr. Sinn details in a very didatic manner, but one "the fierce opposition of the German Bundesbank." I don't doubt the fierce opposition, but Germany since it is a member of the UE can be hold accountable for whatever the UE does, even Germany's voted no to x or y policy of the ECB or any other institution within the UE. I hope Mr. Trump is a good student of Sinn's lessons.

Shame how some people keep twisting the facts to make them fit thire explanation.

Southern European development is tied with the EU, but not on any credit bubble or with the Euro. The period of strong direct investment predates the Euro introduction and has to do with trade development that could be achieved with or without the Euro.

Amazing how economists keep on ignoring the economics of integration and resort to alien explanations to explain phenomena.

We knew that strong aglomeration economies and economies of scale would be produced with the integration on the EU. We knew that even with cost advantages production would migrate to central locations... those are the expected effects.

What we didn't knew then is that Germany would "Kill the EU", that Germany when facing a crisis would reject the "de facto " solidariety that was the norm until then. The solidariety that is needed in an integration process.

Goodness. Everyone can find another party to blame, we can just ignore that and do the math here.

Owners of Banks on both sides of the pond came out of the financial crisis with massive help from their national governments, central banks, or both. How did they even get into the mess in the first place? It was because of about 20 years of de-regulation "reform", in the policies national governments, or in the case of the EZ, collectively - but still heavily influenced by national governments, with de-facto veto power by the major states DE, FR, and UK (them no longer). In all countries, all the "centrist" political parties joined the financial de-regulation club.

So enough excuses. This game might be sufficient for the Trump's of the world but there is an endless supply of them, and we continue to invite them in by avoiding unpleasant reckoning of genuine policy mistakes made by national governments and central banks, who after all are the source of the EU/EMU's powers.

The cavaliers of banking in the US pocketed cash and are bad and somehow cash is being forced on Germany by very naughty people. Oh yes, I must remember - German banks are good banks and other banks are bad banks

Remember when the EZ fails it was not Germany's fault. There was a hollow cost and nobody is allowed make a hollow cost denial

All this article suggests to me is that Germany is pocketing money like mad before it all folds and TARGET2 defaults occur. So why should any country with residual common sense want to come under German federalism

So the author of this article believes that Merkel's Germany is the innocent party and the whole world is guilty of wrong doing? History has been written my friend, it has been written in blood, a piece of advice, revisit the history books and avoid being selective...

There are always two sides to every story, and likewise two sides to every flow of funds: source and recipient.

when he mentions the "cheap foreign credit" that flowed to Southern Europe and was invested in non-productive assets (like housing), Sinn fails to specify the source. Without a source, there would have been no cheap foreign credit, and thus no housing bubble.

Sinn's inconvenient truth is that Germany was the source. If the funds had been spent in Germany on consumption or investment, they would not have been available to flood Southern Europe.

Sinn must accept that Germany's decision to keep unit labor costs low by suppressing domestic household consumption is just as responsible for the problem as Southern European borrowers.

Hanno: yes, I mean the German government. I'm referring to the Schroeder or Haartz reforms, which deliberately reduced labor's slice of the pie. The intent was, as you suggest, to improve Germany's rather dismal pre-Euro unemployment rate.

If labour costs explains the German Miracle, then why aren't the countries with lower labour costs more competitive?

Because labour costs have nothing to do with it.... Productivity is achieved through Technology and scale, considering that techonology is available to all countries, productivity is explained by scale.

That's what you expect with integration. The centralization of production, and that's what benefited germany.

Now you can resort, like Sinn, to Eugenic theories to explain what happened or you can take standard economics and try to understand what happened....

"..Germany's decision to keep unit labor costs low by suppressing domestic household consumption is just as responsible for the problem as Southern European borrowers."

Who's Germany here? Certainly not the government.

The fact is that German trade unions proposed moderating wage growth (not lowering wages!) to prevent higher unemployment (including among their members). Anything wrong with that? I hope you don't think they were morally obliged to act like unions in the southern countries - demanding higher wages and leaving a larger number of workers unemployed.

Anyway, German unions only moderated wage demands for a time. Now Germany has almost full employment and so they're demanding more.

Sinn seeks to exculpate Germany for its too low real exchange rate by passing the blame to the Europe. Yet Germany has a decisive say in Europe! It is not a small country like the Czech Republic.
Germany could have curbed a foolish type of capital flow- tending to depreciate the currency- through timely reform of its uncompetitive financial sector. It chose not to. Germany was quite happy to sell Greek farmers gigantic farm equipment which they could not utilise or pay for because the debt would somehow be rolled over or forgotten without either vendor or customer facing the full penalty.
What does Sinn's argument amount to?
1) Trump is right. German exports are undervalued. Germany could have prevented this by reforming its financial sector- which was so bad that, as Sinn points out, Wall St. coined the phrase 'stupid German money' to describe a type of idiocy more commonly associated with Chavez's regime- not an advanced country.
2) Though Trump is right, still Germany can't be blamed for anything. Why? Germans are fools. They can't help it. Wall Street should stop taking 'stupid German money'. The ECB should never listen to Germany. Germans are stupid and say and do stupid things. So the ECB should do what is right for Germany even if the stupid Germans are preventing it from doing so using their huge political and economic clout.
3) Germans are idiots. They give away their Porsche and Mercedes cars to anybody who can show them an actuarially unsound financial instrument. How can Trump help these mentally defective imbeciles? He should put a quota or tariff on German exports so that they don't once again just give away all their luxury cars for free.

One nation can launch a Trade War with another which is taking resort to unfair means of competition if and only if the other country is sane and rational. But, Sinn tell us, Germans are imbeciles. They can't do rational things. They just give away their Porsche cars for free. Though they are part of the ECB, they are not able to take a responsible part in its functioning. So they still end up doing very stupid things with their stupid German money. Instead of a 'Trade War', Trump should organise an international Conference in which Sinn himself can testify that Germany is an imbecile. It can't be trusted to make sound economic decisions. The International Conference should appoint a legal guardian for Germany with full control over its Economy. Then Germany's real exchange rate will be properly calibrated and the problem Trump correctly identified would at last be solved.

Needless to say, I disagree with Sinn. Germans aren't stupid. Sometimes they are sanctimonious- but so are we.

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